Friday, August 6, 2010

The Fed-the thinking today is that this jobs number was not strong enough to signal a recovering economy and not weak enough to prompt further actions from the Fed/Treasury/White House.

The Fed

the thinking today is that this jobs number was not strong enough to signal a recovering economy and not weak enough to prompt further actions from the Fed/Treasury/White House. People thinking the Fed meeting next week (Aug 11) could wind up being a disappointment if the language is kept pretty much unchanged from the June statement. Amid indications that the US recovery is showing signs of stalling, there has been a lot of talk in the press about what, if any, incremental steps the Fed could take. The WSJ kicked things off Tues morning, writing an article discussing how the Fed was considering making a “symbolic” shift in its bond portfolio towards the direction of more QE (the Journal says the Fed is considering reinvesting the proceeds from maturing bonds into Treasuries). While subsequent reports (inc. on CNBC) have suggested that no major Fed policy changes were imminent (CNBC said the Fed wouldn’t do anything material at this meeting coming up), the consensus thinking has shifted towards thinking about the incremental actions the Fed could take (instead of wondering when they would withdraw/tighten policy). Recall back at his last testimony on Jul 21-22, Bernanke talked about three major weapons still left in the Fed’s arsenal:

Lower the interest rate paid on reserves (now 0.25%); 3) changing the balance sheet (not allowing securities to run off or making additional purchases). However, during that Jul testimony, Bernanke downplayed any talk that further actions were coming soon and said that “we haven't come to the point where we can tell you what our leading options are in the event of another dip lower in the economy”. Bernanke spoke this week (Aug 2) and while he didn’t mention monetary policy specifically, the tenor of his remarks didn’t signal that any major shift in policy was imminent. In addition to the Fed, there continues to be talk in the market of a massive Fannie/Freddie/FHA mortgage refinance/principle forgiveness option. The thinking is that the three government bodies, which have been backing 90%+ of all the mortgages written lately, would automatically refiance all mortgages down to the prevailing historic low market rates (and/or forgive all the principle above and beyond the current value of each home, thereby eliminating negative equity). While Treasury/White House officials have denied the Fannie/Freddie story, investors think this could be an option if housing markets worsen further.